Threat to Scotland's £22bn annual subsidy

The future of the £22 billion annual subsidy paid to Scotland was in doubt last night after a leading Labour politician suggested it could be reviewed.

Wendy Alexander, the party's leader in Scotland, surprised Westminster by hinting that the controversial formula which gives Scots an extra £1,500 a head in public spending could be changed.

Her comments were hotly denied in Downing Street, where sources claimed she had been misquoted on a politically explosive issue.

When Gordon Brown was Chancellor, he rejected persistent calls for a review, claiming any tinkering with the financial relationship between England and Scotland could destroy the Union.

But Miss Alexander's comments triggered alarm bells in Labour circles, where MPs are nervous about a surge in support for the Scottish Nationalists, who won power in Scotland in May.

She is the sister of Douglas Alexander, one of Mr Brown's closest allies at Westminster, who is both International Development Secretary and Labour's general election coordinator.

The Tories claimed it was an attempt by Mr Brown to calm growing anger in England and prepare Scotland for painful financial decisions ahead.

Under the Barnett formula, which was devised in the 1970s by former Labour minister Joel Barnett, Scotland gets about £22billion a year from the Treasury, which means public spending is higher per head north of the border than in England.

The formula has the subject of bitter political debate at Westminster since Scotland was given its devolved parliament in 1998.

Mr Brown has been accused of presiding over a generous financial settlement for his own backyard that has allowed the Scottish executive to offer Scots free university tuition and abolish prescription charges for those with chronic illnesses.

Asked by the Daily Telegraph if she believed no changes to the Barnett formula were needed, Miss Alexander said: "No, I didn't say that."

She said the relationship needed to take account of "anxieties" about how money was raised and the role of the Scottish executive in the light of what she claimed was about to be "the largest public spending settlement we have ever had".

Her willingness to accept the possibility that the arrangement could be reviewed was seized on by the Tories.

Shadow Scottish minister Ben Wallace said: "Wendy Alexander is close to Gordon Brown and would never speak without his approval, so this has to be a sign that things are shifting in Labour circles.

"The suspicion is that the Prime Minister is toying with frustrated English taxpayers, but that when push comes to shove he will never risk angering his fellow Scots by cutting off their supply of extra cash from England."